Thursday, December 16, 2010

All About Industrial Policy: Part 1 - Why?

I'm very glad that Labour has supposedly "lurched to the left" and decided to embrace industrial intervention. It's something I've been in favour of for a long time. thought I'd devote a series of posts to the subject detailing exactly why I think this is a good idea and how it should be done.

Why?
For my first post, I'm going to deal with why I think we need to embark upon a policy of industrial intervention, this is for two reasons, balance of trade and unemployment.

Trade Imbalances
The need to address the balance of trade has been discussed at length since the crash, usually with reference to "global imbalances". Essentially China has been making exporting like crazy and has built up excessive savings,meanwhile in the UK, the US and Europe we've been spending like crazy. This has meant that the UK has had to "import capital".

Importing capital is a worrying prospect because those providing this capital will want to see their a return on their investment. The result is that we are essentially building up a stock of IOU's that we will eventually have to pay back. Some people like Warren Mosler don't think this is a problem that if we can't pay these IOU's than that's our creditor's tough luck, maybe, but to me it seems problematic. First, doesn't seem morally right to let a situation build up where a country goes on a debt binge and then tells it's creditors to go hang, second, there are still implications for economic coordination and economic stability from doing this (I'll try to cover this in a future post).

I don't think the UK needs to switch from being a net importer to a net exported but I do think that we need to aim to keep the trade deficit below around 2% as part of a contribution to a more stable, balanced world economy.

Unemployment
To demonstrate my point here, I'm going to take us back to 2007 before things started to go wrong. The conventional view of 2007 is that it was a prosperous year for the economy, the height of the (what turned out to be unsustainable) boom. We now know that this prosperity was largely an illusion but even ignoring future events there were still serious problems with the British economy.

Firstly, it's worth pointing out that when broken down by region the pricture looked less rosy. Firstly, while the overall unemployment statistics looked good, some regions did a lot worse than than others, these regions were also quite dependent on the public sector for jobs. Second, unemployment was far worse among the males than females, the reasonably low level of female unemployment masks a higher level of of male unemployment. Worst of all was youth unemployment rate of 14.4%.

A youth unemployment rate of 14.4% is unacceptable at any time. The fact that this rate occured at the height of a boom strikes me as a sign that something was quite seriously wrong with the economy, a sign that the status quo wasn't, and indeed isn't working.

Monday, November 01, 2010

John Rentoul on the Banking Bonus Levy

This is not exactly new, but one the unfailingly Blairite commentator has been really getting on my nerves in recent weeks so I though't I'd point out one of his epic failures.

Here's all seeing, all knowing Blairite just under a year ago on the new levy on banking bonuses (my emphasis):
Not only is it arbitrary and indiscriminate, it is likely to be ineffective. Ways round it are certain to be found. No one seriously thinks that it will raise the £550m estimated by the Treasury.
And here's what actually happened:
The government said in September it raised 3.5 billion pounds ($5.5 billion) from a one-time 50 percent levy on discretionary bank bonuses imposed by the last Labour administration. The new levy will generate around 2.5 billion pounds annually, higher in net terms than the bonus tax, the government said today.

Why do people take him seriously?

Tuesday, October 12, 2010

A Few Words on Browne

I thought I'd say a few words on the Browne review out today. One of the first things to say is that educating people to the degree we do is not necessarily useful for the economy. Employers look for a level education when recruiting, the increased number of graduates has simply meant that degree education has replaced A-Level education and Masters/PHD has replaced the degree requirement. This is not to say that we shouldn't educate the numbers of students we do, it's just that we should be clear that the economic benefits of doing so are limited.

The previous argument is important because the Browne review proposes an increase in tutition fees paid for by a loan. The big problem here is that since a university education is no longer a guarantee of a good job, those not lucky enough to get well paid jobs will still have the debt obligation hanging over their heads.

It's the unfairness of this system that I object to, the idea that whether you end up at an investment bank or a call centre you still have the same debt and it's for this reason that I don't support the idea of tuition fees funded by a system of loans and prefer a graduate tax, we'll need to iron out some of the problems, but ultimately it's the fairer option.

Tuesday, September 28, 2010

From The All Seeing All Knowing IMF

Given that the Tories are shouting about their recent mild praise for their policies from the IMF, I thought it appropriate to issue a reminder of the IMF's past omnipotence on thse matters (my emphasis):
Consistent with this favorable outlook, financial sector prospects are strong. Net exports of financial services have risen steadily over the past decade and increased sharply in recent years. UK banks are among the most profitable in the G7 and ratings agencies rank the UK banking system as one of the strongest in the world. The strength of the banking system reflects effective financial regulation and supervision in the context of improved risk management, geographical diversification, and the growth of new business activities. In particular, the development of financial markets has allowed banks to transfer some of the risk that they traditionally held on their own balance sheets. The insurance sector has returned to a more stable outlook. And the ongoing shift from negotiated, bilateral banking finance to arms-length finance through asset markets has facilitated consumption smoothing.
From the Concluding Statement of the IMF Mission in 2006

Monday, September 20, 2010

What would have been nice

Would have been if Nick Clegg had said something along the lines of:
The Lib Dems never were and aren't a receptacle for leftwing dissatisfaction with Labour. There is no future for that, there never was.
..before the election.

I remember quite a few people I spoke to before the election who were under the distinct impresson that they were. I remember a number of people who I canvassed who told me they were voting Lib Dem, but reassured me that they'd never ever vote Tory, I also remember people telling me they thought the Lib Dems were more left wing than Labour.

The Lib Dems may never have been a receptacle for leftwing dissatisfaction, but for a long time they brought an awful lot of dissatisfied lefties along for the ride.

Tuesday, August 31, 2010

Dealing with the Deficit

Alan Beattie, the Financial Times' International Economy editor has challenged me to put forward a set of proposals to plug the budget deficit. Since he seems like a decent enough chap, I thought I'd oblige. It's a bit rough and ready but should hopefully do the trick.

Some Initial Notes
Firstly, I'm going to look to target the structural deficit, a large part of the deficit will disappear as the economy recovers, what we're concerent with is the bit that will still be there. I've set a target figure
of 4% of GDP, this is on the optimistic side but even if it's not the whole deficit it's enough to eliminate most of it.

For I'm using 2009 GDP of £1.392 trillion and applying the OBR figures of 1.2% and 2.3% to arrive at a working higure of £1.442 trillion for 2011. This gives us a target of £57.7 billion in cuts and tax rises. As a final note, I've not gone as far as taking into account dynamic effects from taxes and cuts. I've picked 2011 because the HMRC cheat sheet figures (see below) for 2010 look like they have been adversely affected by the recession, 2011 should (hopefully) represent a more typical year.

Getting On With It
I'm going for a 50/50 split of cuts and taxes so that means finding around £28.8bn of each. For tax rises, I'm using this HMRC Cheat Sheet. For cuts I'm using the BBC's cuts calculator

Taxes
The heavy lifting here is done by income tax, the basic rate has been given most of the work, it's an unfortunate truth that there is only so much that can be raised by taxing the rich. I've steered clear of VAT and where possible looked at taxes that will have the smallest impact on consumption.
  • Basic Rate Up By 3p in the UK and Scotland (£15.45bn)
  • Higher Rate Up By 4p (3.12bn)
  • Freeze Allowances for 1 year (Assume 3% inflation) (£2.55bn)
  • Increase Small Companies Corporation Tax Rate by 1% (£390 million)
  • Increase Corporation Tax by 4% (£3bn)
  • Increase Capital Gains Tax to 45% (£2.97bn)
  • Stamp Duty to 5% on properties over £500K (£750 million)
  • Increase IPT by 1% (£430 million)
  • 4p on a pint of Beer or Cider (£436 million)
  • 17p on a bottle of wine (£303 million)
  • 44p on a bottle of spirits (£136 million)
  • 24p on a packet of cigarettes (£135 million)
  • 2p on a litre of Petrol (£420 million)
  • 1p on a litre of Diesel (£238 million)

Total £30.33bn

Cuts
I've gone in to less detail on cuts, mainly because as one person I just don't have the knowledge of where the cuts could be made for the least pain, I have however put a cap on cuts at 5%, with slightly lower cuts to Welfare and Health and no cuts to Housing.

  • Welfare 3% cuts (£5.88bn)
  • Health 5% cuts £6.10bn)
  • Education 5% (£4.45bn)
  • Defence 5% (£2.00bn)
  • Public Order & Safety 5% (£1.80bn)
  • Personal Social Services 3% (£0.99bn)
  • Housing No Cuts
  • Transport 5% (£1.10bn)
  • Other 5% (£4.7bn)

Total £27.02bn

The total is £57.3billion, a little short of our target but close enough.

A Few Closing Thoughts
It's worth noting that foe Labour to spell out a plan in detail like this would be very politically dangerous, I've tried as much as possible to avoid upsetting anyone too much, but in the end there are some pretty unpopular taxes in the list. I don't mthink all is lost though.

First, the figures above are to deal with the majority of the structural deficit, if we follow Labour's half the deficit plan, we would only need to do half of the above in the course of a parliament, if we were to take a more relaxed approach to the deficit (as Ed Balls proposes) we need to do even less. The second point is that the popularity of certain tax rises/falls is highly dependent on media coverage. The cut iun income tax from 22% to 20% did little for Labour's popularity, the 10p tax was hugely unpopular and a 2007 change to NI that raised nearly £12bn went completely unnoticed. A lot depends on the way the changes are handled politically.

As a final note, there are a few options I've not used here, transaction taxes and land value taxes, for example. I've left these off mainly because I'm not sure of the costings. Finally, there is the option of monetising part of the deficit, it's a radical option but definitely one that should at least get some consideration.

Wednesday, August 04, 2010

A Long Boring Post on Economic Coordination

This post is intended as a bit of a reference point more than anything else, I've long been meaning to write a post like this as a reference to use in future posts.

The best way to consider the concept of economic coordination is to consider the economy as a network of interconnected economic relationships between economic actors. Some will be of a permanent nature (employment contracts, long term contracts and working relationships between firms), others can be implied from patterns of individual transactions (for example, a newsagent might sell around 10 newspapers a day, the individuals buying the newspapers may be different but the volume and nature of the transactions will fit a generalised pattern).

There are two points to make about this coordinated network that it is this coordinated network of economic relationships that provides both the supply and the demand in the economy, disruption of the network destroys productive economic capacity, it can often have knock on effects through the network.

The second point leads on from the first and this is that some destruction of capacity in the economy is both expected and indeed desirable. The network is not static but constantly adapting and changing, new businesses are created as old ones are destroyed. If a firm develops a new method of producing a good, it's likely that the old producers of this good will go out of business. However the labour used in the old processes is now free to be put to alternative uses, this means that new businesses will spring up using this excess labour. This process was originally described by Joseph Schumpeter who coined the term creative destruction.

Some on the right will follow this with the idea that all recessions are adjustments and that the destruction that occurs in recessions leads to new economic activity to replace that which was lost. This is not necessarily the case, the creation of new economic activity is a slow process dependent on the presence of entepreneurial talent to make use of the available resources. The creation of new jobs is a slow and uncertain process.

My final note on coordination is that the ultimate danger of any economic threat, be it inflation, recession or some other shock is that the coordinated network of the economy unravels. This leads to the destruction of economic capacity with it's accompanying decline in standard of living as well as the social problems of unemployment. The ultimate aim of economic policy should be to prevent this occurence.

A Quick Note on Big Society

There are some who say that David Cameron's Big Society is a tremendous opportunity for Labour, that we can't afford to simply dismiss it. Personally I have a big concern that Cameron wan't society to pick up the government's slack out of necessity. I think it might look a little something like this (with thanks to Shuggy)
And if it's too small? America I have been to. The reverse is the case: private opulence, public squalor. My sister lived in California for five years. America's richest state had the parents of publicly educated children exerting themselves in various fund-raising activities because their local schools couldn't afford to employ PE teachers.
I just don't like the idea of society taking up the slack in this way, some might think like the idea of parent's participating in this way, personally I think it should be an option, not a necessity.

Thursday, July 29, 2010

Note to Lord Turner, Take No Notice of the CML

I've been reading with interest what the Council of Mortgage Lenders has been saying about the FSA's mortgage review and I really don't like what they're saying.

The FSA's mortgage review can be found here, it makes a few modest proposals in particular that:
  • Mortgages are only issued to consumers that can afford them (the customer's mortgage payments should not take their total expenditure over their total income and should include a level of contingency).
  • Affordability is to be calculated on a repayment rather than in interest only basis.
  • All mortgages will require proof of income
  • When lending to borrowers with a bad credit history, total borrowing is to be reduced by a defined "buffer zone" amount (so if a borrower could normally borrow £150,000, it might be reduced by the buffer zone percentage, say 20%, to £120,000).
To me these proposals seem both sensible and reasonable (if a little tame), the UK housing market may not have been problematic so far, but we know from the experience in the US the damage that a bursting housing bubble could do. It's a surprise then, to read exactly what the CML thinks about the FSA review.
On a cursory review of the cumulative impact of the proposals in the FSA consultation paper, we do not believe the FSA will achieve its desired outcomes. And it risks serious unintended side effects which will be damaging to consumers' housing choices and to the economy more generally.
I just don't get this attitude, the mortgage market of the noughties is not something to be prod of. The level of choice in the market moved achived the kind of levels that mean't that whole industries sprang up centered around helping customer's decide. The rise of mortgages sold through financial advisers rose to the point that advisers were bidding against each other for potential customers.

Another clear lesson from the noughties is that increasing the available amount of credit didn't do much to aid housing affordability since house prices rose to reflect the increased availablilty of funds. Allowing consumers to stretch themselves is that lenders make more money, but that is not necessarily in the interest of consumers or the more general interests of society.

It really has to be asked why requiring borrowers to prove their income is unreasonable, and why these perfectly sensible measureas are some how depriving consumers of responsiblility. The proposals put forward by the FSA are a sensible response to an overinflated and incredibly risky housing market. The CML's response is nothing but partisan posturing in the name of it's mambers own profit seeking.

Thursday, July 22, 2010

A Brief Note on Inflation

I'm amused by the discussion between Mark Wallace and LeftOutside at LibCon about inflation, naturally my insticts are with LeftOutside on this one, but before I go on I thought I might point out a well known study on inflation by Robert Barro. Robert Barro is the man who came up with the modern version of what we call Ricardian Equivalence (the idea that an increase in government spending will lead to an increase of private saving in anticipation of future taxes), and hardly someone we could call an inflation dove. Here's the abstact of his paper:
Data for around 100 countries from 1960 to 1990 are used to assess the effects of inflation on economic performance. If a number of country characteristics are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year are a reduction of the growth rate of real per capita GDP by 0.2-0.3 percentage points per year and a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Since the statistical procedures use plausible instruments for inflation, there is some reason to believe that these relations reflect causal influences from inflation to growth and investment. However, statistically significant results emerge only when high- inflation experiences are included in the sample. Although the adverse influence of inflation on growth looks small, the long-term effects on standards of living are substantial. For example, a shift in monetary policy that raises the long-term average inflation rate by 10 percentage points per year is estimated to lower the level of real GDP after 30 years by 4-7%, more than enough to justify a strong interest in price stability.

So an empirical study indicates that the effect of a 10% increase in inflation will lead to a loss of 4-7% of GDP over 30 years. That kind of number is so small to be insignificant, and that's for a 10% increase in inflation, the difference between a 2% and 5% would be far harder to judge.

The point I'd like to make from this is mainly to point out that Wallace's main claim that inflation destroys lives doesn't really add up, if there was a genuine negative effect from inflation it would be reflected in the GDP growth figures, since it isn't we can't really draw that conclusion. We can of course say that there is likely to be some level of redistribution from inflation, but there's not really any discernible effect on the nation's overall wealth.

Thursday, July 01, 2010

A Little TPA Silliness

Mark Wallace at the TPA comes out against the Forgemasters loan, suggesting that overall it's unlikely to make the government any money. His maths is correct, looking at the loan in terms of the rate that's been given there's even the possibility that the government might make a small loss on the loan itself but this ignores the bigger picture.

The government is not simply acting as a bank and considering the loan in terms of profitability it is also considering it's wider interests.

  • Firstly, although the loan is unlikely to make a profit, it's cost is going to be as close to zero as makes no difference, making this loan is not going to cost anything.
  • The business being lent to is in Sheffield, an area with a serious unemployment problem as well as providing jobs directly, it will give a boost to the local economy providing further jobs
  • By going ahead with these plans Forgemaster's would have presented a viable alternative to buying nuclear parts from Japan, future nuclear power plants in the UK could have been built with parts manufactured in Sheffield, thus reducing imports, the company could also have bid competitively for work in Europe thus generating exports, all helping this country's balance of trade
Another argument advanced is that if this was truly a viable business then the money have been obtained privately, I have my doubts about this line of reasoning. Right now, as banks attempt to rebuild their fragile balance sheets, companies are having to pay high rates as well as considerable fees to investment banks in order to raise money. The cost of obtaining the credit commercially at this point in time would not make it a viable business opportunity (this in my opinion is a problem with our banking system more than anything).

By cancelling this loan the coalition have missed out on a chance to provide good jobs in an area that sorely needs them and improve the country's balance of trade at virtually no cost, it's a terrible missed opportunity.

Careless Words

Yesterday, David Cameron made a terriblem mistake, when questioned on the subject of unemployment he said the following:
As shown in the budget, unemployment is forecast to fall every year under this government,
He is being very optimistic, in a climate where other nations are cutting back their spending in a major way and where the financial markets are plagued with panic and uncertainty such a bold unambiguous statement will surely come back to haunt him.

A Quick Question

Maybe a silly one, but right now, I have to ask: What the hell is going on? The FTSE tanked in a major way yesterday and today the Daily Mail is talking about doom and gloom in the city. Is there some unseen piece of this puzzle missing? Is something going on in the financial markets that we really ought to know about?

Monday, June 21, 2010

A (somewhat belated) Reaction to Mansion House

As uncomfortable as I am saying this, there were quite a few measures that I actually liked in our new Chancellor's mansion house speech. It does seem that he does at least have a few sensible ideas about reigning in the financial sector.

The FSA No More
Firstly, let me say that there's a lot of idle talk about the failed tripartite system of regulation, there were undoubtedly problems with the financial regulation but it's hard to put this down to the structure of the agencies themselves. The complaints about the supposed "flawed tripartite structure" are little more than a soundbite.

The impression I get is that the FSA is being carved up with the macro prudential responsibilities being given to the Bank of England and the remainder becoming a smaller agency focusing on consumer protection. This sounds sensible enough although it's worth pointing out that there is some crossover between consumer protection and macro prudential regulation and this will need sorting out (the obvious examples here are things like the size of mortgages that lenders can issue and the loan to value ratio).

The idea of a Financial Policy Committee is a good one (indeed, I suggested we needed something like this back in 2008) although as has been pointed out there is a need for more work as far as the structure of this new body, it's relationship with the MPC and how it is to be held to account.

Overall, the only real negative of the new structure is the awfully large amount of power in the hands of the Bank of England, I do wonder if this is an entirely sensible move. I will also add that I don't think that these the majprity of these structural changes would have been much help in preventing the current crisis.

The Vickers Review
The Vickers review looks like it might have potential but it does raise the point that this does seem like a rather watered down version of what the Tories were promising. I do think that separation of investment and retail banking is a good idea and hope that they'll go ahead with it. I'll be watching with interest at what the result of this review is.

And Finally, Something More Ominous
Another aspect of the Chancellor's speech was the talk about China and the possibility of our banks expanding their operations into China, this strikes me as a very dangerous proposition. Iceland had already learned the hard way exactly what can happen expanding your financial services into other far larger countries, and I think it would be safe to say that China would not be nearly as forgiving as the UK was to Iceland. I'll admit that a lot depends on how such an expansion was managed, but it's hard to see how risk could be eliminated completely from such an expansion.

What worries me about this aspect of the speech is that it shows that for all the talk, the chancellor is still quite relaxed, the Chancellor has to realise that financial products are not like other goods, and that their sale carries serious risks, I'm not sure that he does.

Wednesday, June 16, 2010

On Middle Class Welfare

Shorter Policy Exchange and Conservativehome:

In our efforts to rollback the state make necessary cuts we have decided to make an attack on welfare payments made to the middle classes, we will therefore be reducing benefits from the following overprivileged groups: war veterans, war widows, widows, the sick, the disabled, the severely disabled, the mentally ill, pregnant women, industrial injury victims, parents and pensioners

A Few Curiosities

Over at Alphaville theres it's hinted that there may be a connection between Chris Huhne's role as vice chair of sovereign and international finance at Fitch and a report from said ratings agency calling for a more ambitious deficit reduction plan.

Another connection could potentially be drawn between at attempt to change the way homelessness is counted and the numerous cuts being made to various housing programmes.

Sunday, June 13, 2010

On The Leadership Question...

Over the next few months I'm sure I'll see a lot written about  the Labour leadership, I'd like to say the following:
I am sick to death of reading patronising articles by arrgoant journalists, bloggers and former SPAD's about who is supposedly "the only sensible choice" or who will "make Labour unelectable", please just shut the hell up.

Wednesday, May 26, 2010

Stimulus from Across the Pond

My attention has been drawn (thanks to James at Baseline Scenario) to some of the first estimates of the effect of the American Recovery and Reinvestment Act of 2009 (a $787 stimulus bill) on the US economy. I thought I'd repeat a few of the major achievements of the act:
  •  Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,
  •  Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points,
  •  Increased the number of people employed by between 1.2 million and 2.8 million, and
  •  Increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise.
Seems to emphasise the point that in times of trouble, stimulus is the way to go.

Monday, May 24, 2010

Public Sector Cuts and the 1990's

This post is a response to Sunny after a brief exchange on Twitter today on exactly how the left needs to deal with the new government's plans for cuts. For my part I disagree with Sunny's analysis that we should accept the need for cuts, I'm also not sure if it's a particularly good move politically since it plays right into the whole "Labour's Terrible Economic Inheritance" narrative the the new government is trying to spin to the media (I had a bit of a rant about this in my last post).

To see why, we need to take a look at the last recession in 1990 and how the deficit was resolved in that situation. To do this I'm using my favourite methof of late, a graph. The graph below show's the inflation adjusted change in public sector spending alongside the public sector net borrowing:


As you can see, the deficit shot up after the recession evenutally reaching a figure of just under 8%, this is an important point to start with because although it's smaller than the current deficit the two figures are not a million miles apart. The second point is that the Conservative government of the day dis not make cut's, in fact, they actually increased public spending as the recession went on.Further to this, we can see that the recovery in the deficit properly begins shortly after the largest increase in public spending.

My view is that the majority of the reduction in deficit will not come from public service cut's but from economic recovery, that certainly seems to have been the case in the 1990's (as the IMF says: Automatic Stabiliser's Work, Always and Everywhere). When the economy get's into difficulty, it is always tax revenues that take the largest hit, far larger than the actual dip in economic activity, when the economy recovers tax revenues also jump back up far faster. I believe this is the effect we are seeing at the moment as the recent deficit undershoot was nearly four times the size of this year's cuts.

There may be a need to hold back on spending in a few years time, but right now I don't think the left should be falling for this cuts argument.

Rewriting Economic History

I'm really getting pissed off at the Tories endless annoncements that seem to be rewriting recent economic history. As well as spouting all kinds of silly press releases about "Labour's scorched earth tactics" and highlighting the fact that minister's went against the recommendations of their civil servants. They aslo seem to be having a right old go at recent spending plans, and patronisingly lecturing us on how you should run a surplus in a good years (funny how all of a sudden everyone has suddenly picked up the ability to perfectly predict economic cycles and pinpoint exactly the next crash is going to occur).

Let me show you a graph:


See the way those dips in the deficit follow the dips in the economy? That shows what happens in recessions, the deficit increases. What about that tuny little dip that appears just before the almighty one for the recent recession? That would be what the Tories are now deeming LABOUR'S MASSIVE AND WHOLLY IRRESPONSIBLE SPENDING!

That's it, that tiny little bump there is the supposed irresponsible legacy that we have left the new government, for got's sake, you can even see how we were moving to bring it under control. So, coalition people, if you really must make awful accusations about us, at least do the sums first.

Thursday, May 20, 2010

UK Trade in Charts and Graphs

I've put together a few graphs on UK trade, I'm not really going to draw any conclusions from them just yet but I thought I'd put them up for all to see.
First, a breakdown of the split between goods and services in the UK economy, as you can see dominated by goods but with services growing as a share since around 1995.



Next, the UK Balance of trade, very much positive in services, negative or close to zero in goods and mostly negative in total.



And now for the value of British exports and imports.

Monday, May 17, 2010

That 55% Rule

So, after a little confusion about whether this was a change to confidence motions or not. It came to light that this was all part of a plan for fixed term parliaments and the 55% figure was part of an arrangement to prevent the
governing party from calling an election. I still don't like it.

Ultimately, it's not the rule itself that's the problem it's the context. David Cameron's Conservatives do not have a majority, they are part of a coalition that will have difficulty getting it's legislation through parliament. Given the
nature of the coalition there are a couple of questions in need of an answer:

First: Given the weakness of the new government's mandate, should one of the coalition's first moves really be to embark upon radical constitutional reform?

..and second: Should the coaliton's constitutional reform really be made up of policies that seem quite blatantly designed to strengthen it's shaky grip on power?

It's the context of this policy that matters, it looks like the policy is being introduced to get around the problems of a hung parliament. If Cameron's government had a majority then it would be giving up power, as it is it looks more like they're desperately trying to hang on to it and that is something that you know us Labour types are just not going to shut up about.

Scorched Earth?

Apparently, in their last days of office, the government was following a "scorched earth" policy aiming to sign off spending on anything and everything it could. That is the story, at least according to the Times and others, natually I'm a little bit more suspicious.

One of the items is in question as part of this article is:
A series of defence contracts signed shortly before the election, including a £13 billion tanker aircraft programme whose cost has “astonished and baffled” ministers.

This programme appears to be designed to find a replacement for the UK's existing tanker fleet of Vickers VC10s (Introduced in 1964) and Lockheed Tristars (Introduced in 1972). So that's a 46 year old and a 38 year old aircraft design.

Now, I'm no expert on aviation, but it does seem to me that those aircraft designs seem a bit erm...old, and perhaps they might need replacement. That and the fact that the first bids for this project were recieved in 2001 makes me smell a rat.

The whole project has the whiff of a project that was planned very carfully over a number of years with a very sensible aim. Would the new government really have abandoned this project leaving the RAF with it's ancient refuelling craft? That to me just doesn't sound sensible and that's why I'm certainly thinking that this whole "scorched earth" thing is little more than a concoction by our new government's spin doctors.

Sunday, May 16, 2010

A few Thoughts on the Election

Before I get to work on out new LibCon overlords I just thouhgt I'd string together a few thoughts on the election.

I wasn't particularly optimistic about the result, so overall, I'm not that upset about the hung parliament result. Less cheerful for me were the results in East Anglia, my MP Charles Clarke lost his Norwich South seat to the Lib Dems by around 300 votes, we failed to take Norwich North back from the Tories and we lost seats in my hometown of Great Yarmouth and also in Ipswich.

The result in the Eastern region has me seriously worrying about what went wrong and why we suffered quite so badly in the East of England, one thing I intend to do off the back of results is to do some digging and see if I can find any clues to Labour's demise in this bit of the country.

On the subject of coalitions, I'm disappointed that Labour were unable (or possibly unwilling) to form a rainbow coalition, I know it would have been difficult but I don't believe for a second that a Tory government is ever "in the national interest". We can hope that the Lib Dems exert a moderating influence on their Tory coalition partners, but so far this seems to be in vain.

A silver lining in all this is despite all that's happened, the mood of Labour party members is surprisingly upbeat, the talk is about getting back out there and fighting to win back power. That's an incredibly refreshing thing to hear after an election defeat.

Wednesday, May 05, 2010

Has anyone else noticed the housing market?

With the upcoming election, as well as the crisis in Greece it seems like every single ounce of economic punditry has been devoted to discussing the deficit. The housing market has been virtually ignored, I'm thinking this might be a mistake.

Over the last year house prices rose by 10.5%, this leaves them aboout 10% short of the previous high in October 2007 and this has set me thinking. The credit crunch was an American thing, US has prices fell and the whole thing undermined the securitised house of cards that was propping up the whole thing. In Britain we suffered the side effects of this with a fall in house prices, but our house of cards remained intact and prices soon recovered.

I suppose my question is: Were house prices overvalued in 2007? If not then I suppose we can rest easy and be thankful for the recovery. If they were, then we really have to question whether there is some undiscovered point at which our own housing market will suffer a US style collapse.

It may just be me here, a 10.5% growth in house prices in the tail end of a recession just seems over the top. It has me really worried about the state of the housing market. Even if we ignore the social consequences of overpriced housing we still have the question of whether the economic recovery is based on little more than a new bubble in the housing market. If that's the case this elections obsession with the budget deficit will all seem like a lot of wasted energy.

Monday, April 19, 2010

I Swear I'm not Making this Up...

..but when I was out delivering leaflets in my local area I met two old Ladies sat out in their front gardens, one had a Green poster in her window. Steeling myself for the expected verbal earbashing I gathered my nerves and asked the first lady if she'd like a Labour leaflet. She very kindly accepted. I then approached the lady with the Green poster, as this happened, the neigboour came over and a little banter began.

Lady #1 explained how she was really pleased with everything she got from the government. She talked about her pension credits and the heating assistance (includeing the extra payments she'd received for the long winter) and concluded that overall, this government had been very generous to the elderly. She then launched a swipe at the Greens, pointing out that a lot of the "promises" in their leaflet were things that this government already does.

What followed was some incredibly pleasant discussion about politics with one lady certain and the other highly likely to vote Labour, I thanked them and moved on.

Tuesday, April 13, 2010

Protectionist Arguments - The Trade Deficit Fetish

This post is a bit of a late repsonse to a Tim Worstall post on protectionist arguments that supposedly don't add up, this one:
Second, the total balance of trade deficit went from (0.9 billion to 0.2 billion). In other words, the United States was losing less money because of Smoot-Hawley. It was in aggregate better off.
Tim's suggestion is an argument that he's used before, it's imports we want, exports are just the thing we do so that we can afford to buy imports. The real question here is why protectionists make a fetish of the balance of
trade figures railing against the idea of maintaining a negative balance of trade. What follows is my reasoning for why the government should actively seek to address balance of trade problems.

The concern in this case is not that it's a problem in itself, it's more that it's storing up problems for later. While it's possible to have an unequal balance of trade, the balance of payments always has to equal. The result of this is that in a situation where a nation has a trade deficit the shortfall is made up for by other payments.

These payments come from various sources, foreign investments, sale of assets, borrowing and such. The problem with a lot of these payments is that they mean an influx of money now in exchange for a commitment to future outgoing payments. The obvious problem with such a situation is that it is not sustainable in the long term, eventually exports will need to rise in order to meet the need for imports as well as these aquired financial commitments.

There's an obvious response to this which is that a market economy will adjust to this situation and exports will increase. The problem is that when faced with the need to make a sudden adjustment and increase the level of exports the economy will not be able to make these adjustments quickly enough. This is likely to have very nasty consequences both economically and politically.

The path from this line of reasoning to the proposal of protectionist policies then goes like this. Firstly, we accept that the nasty consequences of continuously running a trade deficit are something we would like to avoid. From here we question whether the market economy is capable of sorting it out on it's own account or whether the state needs to intervene, the argument here would be that trade deficit problems are not something individual entrepreneurs concern themselves with and have little power to influence anyway. Once we've made the leap to it being the state's problem we need to take a look at what policies would be most effective at keeping things in check, it's here where protectionism makes an appearance because such policies are incredibly effective at solving trade deficit problems.

Update: Expanded on the last paragraph, since I though the first effort was a bit lacking.

Adair Turner on Financial Regulation

This is Adair Turner's speech to George Soros' ultra new think tank, the Institute for New Economic Thinking.



I watched all 45 minutes of it and I can honestly say that I didn't regret doing it, it was very insightful in both the political and economic observations it made.

Update: Forgot the hat tip to Economists View

Monday, March 29, 2010

Accepting Reality

The phrase the most annoy me at the moment is "accepting reality", when used in the context of government spending. Last Sunday night on Radio 4 an SNP politician who suggested that they weren't all that keen on cuts was accusxed of living in an economic fantasyland. It appears again today in Nick Robinson's "Labour Cuts would be tougher than Thatcher" where he states "This is not the first time the chancellor has caused a stir by accepting reality."

When I first saw the figures for the budget deficit I remember making the suggestion that cuts might be needed, in hindsight that was the wrong thing to say. Admitting the need for cuts is not accepting "reality" it is nothing more than accepting the doctrine of fiscal conservatism, a doctrine that I just don't accept.

One thing that really hasn't been mentioned yet is that often cutting back on government spending doesn't even solve the problem. It's already being suggested that Greece's austerity measures are making their situation worse and there are plenty of other examples from the pages of history.

The problem is that if public sector demand is withdrawn there has to be some kind of other demand to replace it. On this score things are not exactly looking hopeful, private sector demand is slowly coming back, but not in a major way, the British consumer is still suffering under the burden of it's debt. The exports front also looks dim with other countries embarking on austerity measures it looks unlikely that we can look abroad for a source of demand.

Altogether things are not looking hopeful, but concentrating on the deficit at the exapense of everything else is not accepting reality, it's economic suicide.

Thursday, March 25, 2010

Blogroll Additions

Apologies for the lack of posting recently, I'm afraid that I've been a little distracted with work as well as feeling a little short on inspiration. Anyway, I've found the time to add a couple of links to the blogroll.

Firstly, we have John Cook, Labour PPC for Norwich North. A thoroughly nice bloke who I'd rather like to see in the House of Commons. Second, we have Tim Worstall who I've been meaning to add for a while. Despite being an evil Thatcherite I do find his writing both thoughtful and entertaining (and occasionally stupidly pedantic).

The Sun's Economic Nonsense

A very confused fragment of economic commentary, from the Sun:

But Britain is likely to be £1.4trillion in the red in 2015 - with debt making up 75 per cent of our total economic output.

Debt may be equal to 75 percent of the national output but it won't be 75 percent of our economic output will be debt, that doesn't even make sense. Perhaps this is being pedantic but I'd expect someone in the role of business editor of a national newspaper (even if it's the Sun) to explain the debt situation correctly.

More stupidity on the same page from Trevor Kavanagh

The acid test of this Budget was the health of the stricken Pound. Hopes it would flicker back to life were dashed as feeble Sterling FELL against the American dollar.

Beyond all the debate about the relative merits of a strong or weak pound there is the simple truth that the day to day movements of currencies mean absolutely nothing.

I know I shouldn't expect much from the Sun, but it would be nice if their contribution to the economic debate was at least led by people who have a clue.

Thursday, March 11, 2010

RIP Mark Linkous

I'm more than a little saddened this week by the unfortunate death of Mark Linkous, lead singer of Sparklehorse. I'm sure most people have never heard of them, but to me they really were something special. Here's a few songs:





...and one more...

Friday, March 05, 2010

Stuff* Happens

I was really wound up by this particular tweet by @TimMontgomerie (he of ConservativeHome fame).


He points to this Wall Street Journal article pointing out that some Hatian entepreneurs have lost out as a result of the aid operations undermining their businesses. I don't object in any major way to the article, I'm sure it's correct in what it's saying, what winds me up is Tim's judgemental "Will we ever learn?" remark and the implication that somehow we shouldn't really be conducting these kind's of aid operations.

I've never planned an emergency relief operation in a disaster prone country myself but I would guess that the initial information that planners had to work with was pretty sketchy, the details of the worst hit areas where aid was most needed were few and far between and the initial planning had to be done in pretty short order.

Given the incredible difficulty of the task, is it really too much to ask that we simply accept that thing's won't be perfect and deal with problems as they arise rather than immediately allocating blame.

*I'm trying to avoid swearing

Wednesday, March 03, 2010

Another Economists Letter

Writing letters appears to be the done thing for economists these days, the following is one written to the Guardian by a group of economic historians (my emphasis):

We are economic historians concerned at the recent tone of the debate as to the scale and scope of British public sector debt (Report, 2 March). History shows, first, that British public debt is not high by the standards of the last 200 years. It is rather low in comparison to the second half of the 18th century, the first three-quarters of the 19th century, and most of the interwar and post-second world war era in the 20th century. It is also low in the context of the developed world; only Germany's and Canada's are lower among the larger industrialised powers.

Second, the last 20 years has seen exponential escalation in the scale of each financial crisis: the savings and loan scandals of 1985-89, BCCI in 1991, Long-Term Capital Management and the Asian crisis of 1998; Enron in 2001; and then Lehman Brothers and the mayhem of 2008. Each step in this woeful narrative seems to have deepened the moral hazard involved, as speculators have been encouraged to believe that governments would always come to their rescue. Each crisis has demonstrated ever more clearly that, without radical global regulation, jobs and growth in other sectors are cruelly exposed to the costs of risk-taking in which the general public had no say but which it is always expected to pay for.

We urge policymakers to take into account these historical lessons and turn their attention to promoting the economic growth that can speed up the repayment of public debt. This is most likely to occur through enabling the knowledge economy to flourish, rather than continuing to be too reliant on the unreliable and profligate financial sector. The next government should develop a constructive strategy for growth, capitalising on the UK's clear advantage as the home of four of the world's top 10 universities, to invest in its role as an international hub for learning, science, innovation, advanced study and green jobs. Economic growth enabled Britain to escape from crushing debt burdens in the early 19th century and during the 1950s and 1960s. It could do so again, if the public spending cuts that would endanger such knowledge-based growth are ruled out in the short to medium term.
Dr Glen O'Hara Oxford Brookes University
Dr Simon Szreter St John's College, Cambridge
Dr Alastair Reid Girton College, Cambridge
Prof Martin Daunton Trinity Hall, Cambridge
Prof Jane Humphries All Souls College, Oxford
Dr Richard Sheldon University of Bristol
Prof Jim Tomlinson University of Dundee
Prof David Edgerton Imperial College London
Prof Roger Middleton University of Bristol
Prof Geoffrey Hosking University College, London
Dr Richard Toye University of Exeter
Prof Steve Hindle University of Warwick
Dr Hugh Pemberton University of Bristol
Prof Frank Trentmann Birkbeck, University of London
Prof Noel Whiteside University of Warwick
Dr Paul Ryan King's College Cambridge
Prof Patrick O'Brien London School of Economics
Dr Paul Warde University of East Anglia
Prof Ronen Palan University of Birmingham
Dr Scott Newton Cardiff University
Members of the History & Policy network

Tuesday, March 02, 2010

Pre Emptive Economics #3 and some notes on Inflation

I've long been a bit of an inflation dove, and right now I'm quite happy to see Olivier Blanchard at the IMF agreeing with me on the whole subject of dealing with inflation. In particular he's suggesting changing the inflation target from 2% to perhaps 4%. David Smith posts his objections to the idea here. Personally I find this arguments a little weak.

Firstly:
It is wrong because, while I am no inflation nutter, adopting a target that doubles the price level every 15 years seems to me irresponsible. It is wrong because it would endorse every suspicion in the bond market that governments will seek to inflate their debt away, rather than go through the hard job of raising taxes and reining back spending. It would be a surefire way of igniting a huge sell-off in government bond markets.
My problem is not really economic, it's political. My probelm with David's argument is that it approaches the issue with rights of debt holders first and foremost. What I believe we have in this situation is a trade-off  between a government's obligations to it's creditors and it's obligations to it's citizens. Naturally, I believe that in a democracy the latter should come first.

Further to this, I think it's worth considering how outstanding financial contracts will affect economic growth. In the current economic state of affairs the government, corporations and citizens are all heavily indebted. The upshot of this is that we are likely to see low investement and low consumer spending. Debt, as it stands is likely to be a major drag on economic growth, it may even drag the economy back into recessions. The government's creditors might not like losing out to inflation, but it's a damn sight better than the government getting into the situation where it has to default.

...he continues...
Most of all, I think it is technically wrong. Imagine if, over the past 10 years, Britain had had a 4% inflation target. Most of that period, inflation was below 2%. To inflate up to the higher target, interest rates would have needed to have been lower rather than higher. A 4% inflation target might have been associated with a typical Bank rate of 2% or 3%, rather than 7%. The future will be different from the past but perhaps not that much. A higher inflation target would have meant an even bigger boom is asset prices.
I'm not sure about this myself, there are a good few arguments against this. Firstly, it could be argued that low inflation provided an incentive to banks to expand their loan books throught he use of derivatives. The financial crisis was a problem of plentiful money more than one of cheap money. Further to this inflation has the effect of reducing the nominal amount of any liabilities meaning that financial institutions would have had fewer problems with the build up of risk.

At the end of the day, 2% seems a pretty arbitary figure so I don't really see any reason why change would necessarily be a bad thing.

Wednesday, February 10, 2010

A Few Thoughts on the Robin Hood Tax


I rather like the idea myself, but I thought I'd say a few things about it and address a few criticisms that have headed it's way.

Firsly, my criticism, which is that I think hundreds of billions is too optimistic. I just don't think it will raise that much. My guess would be that it would lead to a serious reduction in the volume of foriegn transactions that took place. That said, I don't think that this is necessarily a compelling reason not to go ahead with it.

Now, on with some other criticisms:

Capital is mobile and this activity will just move elsewhere.
I think this one depends on how it was levied. If the tax was levied on actual foreign exchange transactions (changing one currency into another) then I think this would be the case. There's nothing to really stop someone setting up in a tax haven that ignores the tax and acting as a counterparty to foreign exchange transactions.

An alternative would be to force banks in their host nations to levy the tax on bank transfers to and from accounts outside the host nations's borders. This would prevent a nation that didn't want to play ball undermining the tax, money could be moved in and out of this nation untaxed but it would still face a tax if it was ever moved into a participating nation.

Following on from the above, there is an argument that imposing such a tax would give an advantage to those counties that choose not to participate, I don't see this as a huge problem. While a country without the tax might be a little more attractive to foreign investors, it's hardly likely to be the only factor an investor takes into account when making their decision.

It would create a huge new class of arbitrageurs seeking to exploit such price discrepancies
An argument put forth by Oliver Kamm. He's correct, but the same can be applied to plenty of other government interventions in the economy. The question is whether such aribitrage will be a massive problem or a minor irritation. My guess would be the latter.

If such an act did create a some kind of price discrepancy between participating and non participating countries we have to wonder how long the effect would last, once the tax became a fact of life would we still see distortions? Additionally, is it beyond the ability of regulators to deal with the worst forms of arbitrage? And if indeed it did affect asset prices, would this be viewed as a distortion or a correction?

The Last Word
I'm personally not sure exactly how a robin hood tax would work, my guess would be buy taxing transfers across international borders. I'm not sure if there are any holes in this approach but nothing obvious comes to mind. I accept some of the arguments put forward by critics, but personally I don't think they make a strong enough case against this tax.

Monday, February 08, 2010

A Small Matter of the Facts

Guido says of Gordon's coming visit to Greece:
At the end of last week Guido learnt that next week Gordon is scheduled to meet George Papandreou, the socialist Greek prime minister who has led his country to ruin.

I should point out that George Papandreou was in fact elected in October of 2009. The actual leading of the country to ruin happened under the rule of the centre right New Democracy party who not only led the country to ruin but also lied about the state of the economy.

A little basic fact checking might be in order.

Wednesday, February 03, 2010

A Few Words on Rod Liddle and the Independent

The folks over at libcon have been running a bit of a campaign against the idea of Rod Liddle as the editor of the Independent, the latest is an attempt to raise money for an ad in the Independent itself. I was being a bit of a spoilsport on Twitter about it so I thought I'd make my views a bit clearer.

So, first I have to say that given his numerous offensive comments and the like, Rod Liddle as a columnist comes across as a bit of a twat, more than just a bit actually. The thing is, much as I don't like what he writes I can't really say that is really enough to stir up the idea that Rod Liddle absolutely must not get the job.

His writing seems to have almost descended into some kind of wierd self parody to the point it's hard to tell what he actually believes. I also have to say that when he was editor of The Today Programme, I didn't really catch much of Rod Liddle the immense tosser.

I don't particularly like the guy, but I just can't bring myself to hate him enough start actively campaigning against his editorship.

Tuesday, February 02, 2010

Tom Harris, Compass and Product Placement

There's been a bit of a spat developing between Compass and Tom Harris over this whole product placement affair. Personally (and not particularly surprisingly), I'm with the Compassites rather than the proto Blairite.

Beyond the idea of protecting our children I think there are a few other reasons worth considering. Firstly, there's the issue of regulatory complexity. It's often the case that liberalising or deregulating rules on something can actually make it harder and more resource intensive to regulate and this is a good example.

At the moment, policing product placement is simple (what part of "no" don't you understand?). If the ban is lifted it requires a new series of rules to ensure the product placement is not used gratuitously, this will require both a new set of more complex rules and the recources to enforce them. By removing the ban we actually make regulation of television more complex.

Further to this there are some economic arguments. Advertising, can in some ways be viewed as a transaction cost with the external effect of increasing consumer demand. In a society that is underconsuming this might be considered a positive externality, but is that really ther case in the UK?

Robert Peston's figures show our national debt (personal, corporate & government) as 380% of GDP, the years leading up to the credit crunch were characterised by lifestyles financed on debt, people living beyond their means. Considering the consequences of our overconsumption previously, do we really want to happily embrace a change that is likely to further fuel that culture of consumption?

Wednesday, January 20, 2010

Silliness at the Spectator

The Spectator amazes me, it seems that it doesn't matter how good the news is, the slightest connection with Gordon Brown's government will have them searching for a cloud to accompany the silver lining.

So, despite the surprisingly good news that unemployment has fallen, despite the fact that unemployment is usually a lagging indicator and normally starts dropping well into the recovery and despite the fact that unemployment is way below the 3 million predicted by the CBI last February, they still manage to put a negative spin on the good news.

Tuesday, January 05, 2010

Who's Right?

Alex Smith reckons it's First Blood to Labour, Iain Dale reckons that the Tories Dominate the Political News Agenda. A more pertinent question might be How Long Will it be Before I'm Bored Rigid?

I see Tom Freeman is thinking along similar lines.

Monday, January 04, 2010

Starting the Year

First off a little statistic from the FT relating to the deficit and the FT's survey of economists:
Asked to name the three biggest risks to the economy, 37 of the 79 economists polled said the UK was threatened by a fiscal crisis that could derail any revival.
As far as I can tell this means that 42 of the FT's 79 did not list the fiscal deficit as one of their three biggest risks. This stikes me as signifigant because it means that 42 of their 79 economists thought their were three risks to the economy more signifigant than the deficit.

This is important because we have a political climate that is forming a consensus that suggests that cuts should are an absolutely and completely obvious priority and OMG HOW CAN TEH GORD NOT SEE ITZ!!!?!

So, let me stress for the new year: there is no real consensus around the need to make cuts.

Sunday, January 03, 2010

2010 Predictions

I've not done predictions before, but apparently they're all the rage on the blogosphere, so I'll have an attempt.

1) Charles Clarke will retain his Norwich South seat, his majority will very thin (around 1,000) and all political opponents (Green, Lib Dem and Tory) will be close behind.

2) John Cook will win Norwich North for Labour

3) We will see a hung parliament at the next election

4) The price of gold will remain roughly unchanged

5) Gilt yields will rise as quantitative easing is withdrawn but will remain at low levels

6) House prices will fall slightly as tougher regulations come into play

7) CPI Inflation will rise above the governments target, but signifigantly so

8) The economy will recover more quickly than expected

9) Talk about China's exchange rates will hot up, possibly leading to some serious trade related confrontations between the US and China.

10) I will be a better windsurfer